Why Mergers Collapse

May 23, 2008

By Joyce Harper

A merger between two businesses could be likened to a marriage between two individuals. Most often, when the two decide to become one, the wedding and subsequent marriage go off without a hitch. Sometimes, however, problems do arise and even after the rings have been purchased, the wedding and/or engagement is called off.

The same can be true in business. After the exploratory work has been completed, somewhere between due diligence and the signed documents, the merger agreement could collapse. One party could withdraw their offer or another party could reject the proposed terms. Whatever the reason, the planned merger never gets off the ground. This is not the norm, but neither is it anomalous. Until the final paperwork is signed, nothing is absolute, which explains why business leaders are extremely careful about disclosing merger information before the deal is complete.

For publicly or privately held companies, a well managed merger followed by a well planned and executed integration strategy, could be an ideal way to grow or expand within a particular industry. However, business leaders looking to grow their business through M&A should be mindful of potential problems that could destroy the deal. Three of the most common reasons mergers collapse are:

1. Financial Pitfalls. This can include anything from an acquirer being unable to secure appropriate funding to the discovery of questionable financial practices by one of the organizations. Previously undisclosed problems are usually exposed during the due diligence phase of the merger process. This is when organizations take the time and bring in experts to evaluate—and reevaluate—the stability of the merging companies. When major problems arise, one or both organizations may have the right to invoke the "stop clause" to halt the merger.

2. Synergistic Differences. Organizations with seemingly similar corporate ideals can be in for a rude awakening during a merger if experts begin uncovering concerns that could affect the long term stability of the merged companies. For example, if company earnings have consistently decreased over the past several years due to diminishing consumer demand or if the management team has misrepresented the condition of the organization by "adjusting" growth projections. Depending on the severity of the concerns, it may be cause to discontinue merger talks.

3. External Barriers. Sarbanes-Oxley, SEC regulations or FAA policies and compliance matters can quickly become a "red flag" during an impending merger. Regulatory issues governing things such as fair competition, monopolies and the like, could lead to a slowdown or freeze of the merger activities. A prime example was the merger between XM Satellite Radio Holdings Inc. and Sirius Satellite Radio Inc. The FCC held the merger up for months before finally granting approval earlier this year. There was major concern that the merging of these companies could negatively affect competition, thereby hurting the consumer.

Every merger and acquisition unfolds with its own set of idiosyncrasies that will ultimately have an impact on the outcome of the negotiations. But a shrewd business leader knows how to build a team of experts to help navigate those challenges while keeping a close watch for regulatory, synergistic or financial barriers.

Joyce Harper is an online columnist for Sales & Marketing Management. She is the Founder/CEO of Sharper Solutions, LLC, a management consulting firm specializing in organizational development and strategic management. She works with companies nationwide helping them create organizational effectiveness and increase their revenue building potential. Joyce is a sought after speaker, trainer and business consultant. Contact her through the company Web site at www.sharpersol.com.